SECURITIES AND EXCHANGE COMMISSION
                                   Washington, D.C.
          SECURITIES EXCHANGE ACT OF 1934
          Rel. No. 34-40646  / November 9, 1998
          Admin. Proc. File No.  3-9212
          ________________________________________________
                                                          :
               In the Matter of the Application of        :
                                                          :
                    SCATTERED CORPORATION                 :
                              and                         :
                  LEON AARON GREENBLATT, III              :
                    ANDREW ALVIN JAHELKA                  :
                    RICHARD OWEN NICHOLS                  :
                        LAURA BRYANT                      :
                                                          :
               For Review of Action Taken by the          :
                                                          :
                THE CHICAGO STOCK EXCHANGE, INC.          :
          ________________________________________________:
          OPINION OF THE COMMISSION
               REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
                    Market-making firm, its principals, and floor nominee
                    were found, after disciplinary proceeding, to have
                    violated antifraud, market manipulation, and books and
                    recordkeeping provisions of the Exchange Act, Exchange
                    Act rules, and stock exchange rules.  Held, proceeding
                    set aside because fairness of proceeding was impaired
                    when outside private law firm simultaneously provided
                    legal counsel to the exchange hearing examiner and to
                    the exchange in litigation against Applicants based on
                    the same facts.
          APPEARANCES:
               C. Philip Curley and Judi A. Lamble, of Robinson Curley &
          Clayton, P.C., for Scattered Corporation, Andrew A. Jahelka, and
          Richard O. Nichols.
               Leland W. Hutchinson, Jr. and Elizabeth D. Sharp, of
          Freeborn & Partners, for Leon A. Greenblatt, III.
               Lawrence R. Samuels, Jacquelyn F. Kidder, and Patricia K.
          Smoots, of Ross & Hardies, for Laura A. Bryant.
               Douglas J. Hagerman and Carolyn Knecht, of Foley & Lardner,
          Brian D. Roche and Michael J. Kaufman, of Sachnoff & Weaver,
          Ltd., and Daniel J. Liberti, of The Chicago Stock Exchange, Inc.,
          for The Chicago Stock Exchange, Inc.
          Appeal filed:  January 8, 1997
          Last brief received:  May 8, 1997
                                          I.
               Scattered Corporation ("Scattered"), an Illinois corporation
          and former member of The Chicago Stock Exchange, Inc. (the
          "CHX"); Leon A. Greenblatt III, Scattered's secretary and 50%
          owner; Andrew A. Jahelka, Scattered's president and 30% owner;
          Richard O. Nichols, Scattered's treasurer and 20% owner; and
          Laura Bryant, registered CHX market maker and Scattered's nominee
          on the CHX trading floor, (hereinafter collectively referred to
          as the "Applicants") appeal from disciplinary action by the CHX.
               The CHX found that the Applicants sold short shares of LTV
          Corporation ("LTV") common stock ("Old LTV Stock"), manipulated
          the price of Old LTV Stock, and employed deceptive devices, in
          violation of the Securities Exchange Act of 1934 ("Exchange Act")
          and The Chicago Stock Exchange Rules ("CHX Rules"). [1]  The CHX
          also found that the Applicants violated CHX Rules in that they
          abused their positions as registered market makers.  Further, the
          CHX found that the Applicants, other than Bryant, excessively
          traded Old LTV Stock, violated various books and recordkeeping
          provisions of the Exchange Act and CHX Rules in connection with
          Scattered's LTV trading and failed to provide information to the
          CHX during its investigation.  The CHX also found that the
          Applicants, other than Nichols and Bryant, manipulated the stock
          price of American Healthcare Management, Inc. ("AHI") common
          stock, in violation of the Exchange Act and CHX Rules.
               The CHX expelled Scattered from CHX membership and fined it
          $3.5 million.  It permanently barred Greenblatt from association
          with any CHX member and fined him $1.3 million.  The CHX
          suspended Jahelka, Nichols and Bryant from association with any
          CHX member for two years, one year, and one year, respectively,
          and fined them individually $750,000, $580,000, and $350,000,
          respectively.  The CHX also fined Scattered, Greenblatt, Jahelka,
          and Nichols, jointly and severally, $300,000; and separately
          fined Greenblatt, Jahelka, and Nichols, jointly and severally,
          $50,000.  The CHX also ordered disgorgement of one-half of the
          Applicants' trading profits.  We base our findings on an
          independent review of the record.
                                         II.
               This case arises out of the Applicants' massive short
          selling of Old LTV Stock during LTV's bankruptcy reorganization
          proceedings, which resulted in a plethora of litigation.  In much
          of this litigation, the Applicants and the CHX participated in a
          variety of capacities.  The CHX found itself playing multiple
          roles in the litigation concerning the applicants, thereby
          creating the possibility that the CHX's impartiality in
          adjudicating the Applicants' case could be affected.  This issue
          became a focal point in the disciplinary proceeding.
          The Applicants' Trading In Old LTV Stock
               In 1986, LTV filed for reorganization under Chapter 11 of
          the U.S. Bankruptcy Code.  In February 1993, LTV filed a plan of
          reorganization (the "Plan") with the U.S. Bankruptcy Court for
          the Southern District of New York, which was approved on May 27,
          1993.  Pursuant to the Plan, Old LTV Stock would cease to trade
          on June 28, 1993.  On that date, owners of Old LTV Stock would
          receive one warrant to purchase 1.08 shares of common stock in
          the reorganized LTV ("New LTV Stock") in exchange for every 100
          shares of Old LTV Stock held.  When the Plan was announced, Old
          LTV Stock was trading for more than 30 cents.  The Plan included
          an estimate that, upon implementation of the Plan, shares of New
          LTV Stock would be worth approximately 3 or 4 cents.  New LTV
          stock would begin trading on June 29, 1993.
               The Applicants sought to capitalize on investor confusion
          about the true value of Old LTV Stock during the period leading
          up to June 28, 1993, the date the LTV reorganization would become
          final.  They assumed most investors would not read or understand
          the actual valuation of Old LTV Stock prescribed in the Plan and
          that, therefore, demand for Old LTV Stock would be high, even
          though its value after the reorganization would be almost
          nothing.  After the Plan was filed, but prior to the Bankruptcy
          Court's approval of the Plan, the Applicants began selling Old
          LTV Stock short on both the CHX and on the New York Stock
          Exchange, Inc., anticipating that the price of Old LTV Stock
          would fall.
               Under this Commission's short sale rules, a short seller
          must deliver the stock sold short if and when demanded by the
          purchaser.  From February 26, 1993 to June 28, 1993 (the "Trading
          Period"), the Applicants sold short approximately 170 million
          shares of Old LTV Stock.  At that time, there were only
          approximately 122 million shares of Old LTV Stock outstanding.
          The Applicants planned, in the event purchasers demanded delivery
          of the Old LTV Stock that had been sold short, to deliver "when,
          as, and if issued" warrants ("When-issued Warrants").  The When-
          issued Warrants would entitle the holder to exchange Old LTV
          Stock for New LTV Stock six months after the implementation of
          the Plan.  They were substantially the same as the warrants
          issued pursuant to the LTV reorganization plan.
               Buyers were not required to accept When-issued Warrants in
          lieu of Old LTV Stock, although by the time the When-issued
          Warrants were to be issued Old LTV Stock would no longer be
          trading.  As an alternative, buyers could "buy-in," i.e., make
          covering purchases of LTV shares in the open market and charge
          the difference to Scattered. [2]  Buyers would have an economic
          incentive to demand delivery of stock or buy-in only if the
          market price of Old LTV Stock was higher than the short position
          price specified in their contract with Scattered.  The Applicants
          gambled, however, that most purchasers of Old LTV Stock would not
          demand delivery of their shares, or "buy-in" if Scattered could
          not deliver Old LTV Stock, because the price of Old LTV Stock
          would continue to fall throughout the Trading Period.  Had the
          Applicants been required either to deliver shares or to make good
          on "buy-ins," they would have had to make a capital outlay that
          could have bankrupted the firm.
               This possibility alarmed the CHX and its subsidiaries the
          Midwest Clearing Corporation (the "MCC") and the Midwest
          Securities Trust Corporation (the "MSTC") because it placed the
          MCC and the MSTC at risk of insolvency.  As Scattered's clearing
          firm at that time, the MCC was obligated to complete Scattered's
          trades in the event of its default.  The MSTC was the guarantor
          of the MCC's trades and would be required to pay out any losses
          on Scattered's trades from its Participant Fund.
               Consequently, both the CHX and the MCC demanded and received
          assurances from the Applicants regarding the firm's ability to
          meet its obligations in the event of buy-ins.  The MCC withheld
          Scattered's accrued commissions and profits, totalling several
          million dollars, to cover any potential exposure resulting from a
          Scattered bankruptcy.  The MSTC also required Scattered to make
          additional contributions to the MSTC's Participant Fund and
          withheld Scattered's settlement credits in order to ensure that
          the LTV short positions could be covered in the event of
          Scattered's default.
               Because the Applicants had assessed the market for Old LTV
          Stock accurately, they avoided having to deliver shares prior to
          the end of the Trading Period, and netted approximately $27
          million in short-selling profits.  Numerous investors on the buy
          side of Scattered's trading incurred substantial losses.
          Litigation Arising Out of Trading in Old LTV Stock
               Soon after the trading in Old LTV Stock ceased, several
          groups of LTV shareholders who had purchased Old LTV Stock during
          the Trading Period, led by the market-making firm of Sullivan &
          Long, filed complaints against Scattered, Greenblatt, Jahelka,
          and Nichols.  These cases were consolidated in the United States
          District Court for the Northern District of Illinois in a class
          action complaint (the "Class Complaint").  The Class Complaint
          alleged that Scattered and its principals committed securities
          fraud in violation of Exchange Act Section 10(b) and Rule 10b-5,
          sold unregistered securities in violation of Section 12(1) of the
          Securities Act of 1933, obtained unjust enrichment, and violated
          the Racketeer Influenced and Corrupt Organizations Act.  It named
          the CHX and the MCC as third-party defendants, seeking to impose
          a constructive trust on Scattered's LTV trading profits.
               On March 29, 1994, the district court dismissed the Class
          Complaint with prejudice. [3]  The court held that the plaintiffs
          had failed to allege any set of facts that would entitle them to
          relief.  The court concluded that Scattered had neither made
          misleading statements nor engaged in market manipulation as
          alleged in the Class Complaint.  Instead, the court found that
          Scattered had injected accurate information into the market,
          bringing the price of Old LTV Stock into line with its actual
          value.  The United States Court of Appeals for the Seventh
          Circuit affirmed. [4]
               Concurrently, other related litigation ensued between the
          Applicants, on the one hand, and the CHX, the MCC, the MSTC, and
          their personnel and officers on the other.  During the last week
          of the Trading Period in June 1993, the CHX sought to impose new
          "cash delivery" rules in order to prevent Scattered from
          continuing to sell Old LTV stock short.  In response, Scattered
          sought, in Illinois Chancery Court, an order temporarily
          restraining the CHX and the MCC from imposing the new "cash
          delivery" rules.  After the requested order was denied, Scattered
          and Greenblatt initiated a suit in Illinois Circuit Court seeking
          damages against the MCC and the MSTC.
               In July 1993, the MCC initiated disciplinary proceedings
          against Scattered and Greenblatt, which resulted in the denial of
          Scattered's access to MCC and MSTC clearing facilities.  The MCC
          accused Scattered and Greenblatt of falsifying certain documents
          when applying for clearing privileges through the MCC the
          previous year.  Although the MCC's allegations did not relate to
          Scattered's LTV trading, these same allegations of document
          falsification appeared in the complaint in the instant CHX
          disciplinary proceeding and were among the findings of violation
          against these Applicants.
               Another suit brought by Scattered and Bryant in the United
          States District Court for the Northern District of Illinois
          sought to bar the CHX from requiring that Scattered open a
          special account for market makers, a "V account," with the MCC.
          This complaint was dismissed. [5]  In 1994, Scattered and
          Greenblatt also sued the CHX and its Board of Directors and other
          CHX personnel in Delaware and Illinois for allegedly misusing CHX
          member funds.  After several years, these cases were also
          dismissed. [6]
               Next, in June 1994, the CHX expelled Greenblatt from its
          trading floor for allegedly acting in an abusive and disruptive
          manner.  We granted Greenblatt's motion to vacate the CHX's
          action and remanded the matter for further development of the
          record. [7]
          Foley & Lardner's Representation Of The CHX
               In July 1993, the CHX dissolved its in-house legal
          department and contracted with the law firm of Foley & Lardner
          ("Foley") to perform the duties of general counsel and all of
          CHX's legal work.  One of Foley's partners, George Simon, acted
          as the CHX's general counsel and former CHX general counsel Craig
          Long became a Foley partner and an officer of the CHX.  In
          virtually all of the litigation discussed above, the CHX, the
          MCC, the MSTC, and associated individuals were represented by
          Foley. [8]
               During a meeting among CHX, MCC, and MSTC personnel on July
          9, 1993, Simon and Long initiated the CHX's investigation into
          whether Scattered had violated any CHX rules during the Trading
          Period.  Subsequently, in August 1993, Simon corresponded with
          attorneys at the Federal Reserve Board to inquire whether
          Scattered's arbitrage strategy had violated Federal Reserve
          System margin requirements.  Simon also appeared as counsel or as
          a witness in one or more of the aforementioned proceedings
          between the Applicants and the CHX and related entities and
          persons.
               Later in 1993, Simon, on behalf of the CHX, retained the law
          firm Sachnoff & Weaver ("Sachnoff") to represent the CHX Division
          of Market Regulation ("Market Regulation") in pursuing the
          investigation into possible wrongdoing by the Applicants in
          connection with LTV trading.  Sachnoff's legal fees were reviewed
          and approved by Foley prior to being submitted to the CHX for
          payment.  Market Regulation's investigation resulted in the
          institution of the instant disciplinary proceeding in late
          November 1993.  The allegations in Market Regulation's proceeding
          substantially reiterated, among other things, the allegations in
          the Sullivan & Long litigation that Applicants had manipulated
          the market for Old LTV stock.  Once the proceeding was
          instituted, Simon, on behalf of the CHX, hired Gordon L. Nash (an
          attorney not associated with Foley) to serve as the CHX Hearing
          Examiner.
               In February 1994, J. Scott Early became a Foley partner.
          Shortly thereafter, Simon appointed him to assist the Hearing
          Examiner.  Prior to this appointment, however, Simon had directed
          Early to review various files concerning Scattered, including
          files relating to the ongoing litigation matters between the CHX
          and the Applicants.  Early billed only a brief amount of time to
          the review of these files, but it is not disputed that Early was
          not restricted in his ability to review Foley files relating to
          Scattered.
               On April 22, 1994, Foley implemented a formal screening
          mechanism to screen Early from other matters involving Scattered
          pending within Foley ("the Screen Agreement").  The Screen
          Agreement prohibited Simon, Long, John D. Lien, Dean M. Jeske,
          and J. Lynn Dennison (collectively, the "Screened
          Attorneys") [9] from "discussing with Scott Early or any other
          Foley attorneys who subsequently represent the hearing officer
          the substance of his representation of the hearing officer and/or
          the merits of the Scattered Disciplinary Proceeding."  The
          Screened Attorneys were also restricted from access to Early's
          computer hardware and software and any files or documents
          associated with his representation of the Hearing Examiner.
          Early agreed that he would not discuss or share information
          obtained during his representation of the Hearing Examiner with
          the Screened Attorneys.
               The Screen Agreement was extremely limited in scope.  The
          record indicates that at least five other Foley attorneys other
          than the Screened Attorneys worked on Scattered-related
          litigation.  The Screen Agreement did not prohibit Early from
          accessing Applicant-related files other than those relating to
          the Scattered disciplinary matter, or prevent Early from
          obtaining remuneration from Foley's representation of the CHX.
          While it prevented the Screened Attorneys from discussing the
          Applicants' disciplinary proceeding with Early, the Screen
          Agreement did not prevent them from discussing with Early issues
          related to the ongoing litigation matters between the CHX and the
          Applicants.
               In June 1994, the Applicants sought to have Foley and
          Sachnoff disqualified from participating in the CHX disciplinary
          proceedings due to:  (1) Foley's representation of the CHX and
          the MCC in the Class Complaint litigation and other proceedings
          involving Scattered, (2) Early's participation in the Scattered
          disciplinary proceeding, and (3) Sachnoff's relationship with
          Foley.  Market Regulation opposed Applicants' efforts in
          pleadings submitted by Sachnoff.  In addition, however, Foley
          attorney James M. Caragher (not one of the Screened Attorneys)
          filed two briefs on behalf of Foley opposing the disqualification
          motions.  Scattered objected to the filing of these briefs by
          Foley on the grounds that the firm was not a party to the
          disciplinary proceeding and that Caragher's partner, Early, would
          be assisting the Hearing Examiner in ruling on Foley's briefs.
          In October 1994, the Hearing Examiner denied the disqualification
          motions.
          The CHX Judgment
               On June 22, 1995, the Hearing Examiner issued a Proposed
          Written Judgment and Determination (the "Proposed Judgment")
          finding substantially all of the violations alleged in the CHX's
          complaint against Scattered.  The Proposed Judgment found that
          the CHX disciplinary proceedings were not controlled by the
          Seventh Circuit's decision in Sullivan & Long finding that no
          manipulation had occurred, and imposed sanctions.  In accordance
          with CHX rules, the Proposed Judgment was submitted to CHX
          president Erwin Schulze. [10]  Schulze subsequently adopted the
          Proposed Judgment, but increased the sanctions by ordering the
          Applicants to disgorge "half of the moneys received" to a fund
          payable to persons harmed by their actions.  The Applicants
          appealed the judgment to the CHX Judiciary Committee.
               On July 17, 1996, the CHX Judiciary Committee affirmed the
          Hearing Examiner's decision, as adopted by the CHX president,
          although it modified the rate of interest applied to the
          judgment.  Initially, Foley acted as counsel to the CHX Judiciary
          Committee.  The Applicants again raised their conflict of
          interest claims.  In response, the CHX Judiciary Committee
          retained Baker & McKenzie to represent it and then denied
          Applicants' motions as moot.  The Applicants appealed to the CHX
          Executive Committee and renewed their arguments that Foley should
          have been disqualified from acting as counsel for the Hearing
          Examiner.  The CHX Executive Committee, represented by Kirkland &
          Ellis, denied the motions and affirmed the judgment on December
          31, 1996.  Scattered then appealed the matter to this Commission.
                                         III.
               This case raises complex issues on the merits.  However, we
          must first examine whether the CHX's disciplinary proceeding was
          fair, involving as it did Foley's simultaneous representation of
          the CHX as counsel to the Hearing Examiner adjudicating the
          Applicants' alleged violations and as counsel in various ongoing
          litigation matters involving these same Applicants and the same
          and related conduct.  We conclude that the proceeding was not
          fair, and that subsequent review by the CHX president, Judiciary
          and Executive Committees did not cure that unfairness.  In light
          of this determination, we do not reach the other issues in this
          case.
          Fairness Standards for SRO Disciplinary Proceedings
                Disciplinary proceedings against members of an exchange and
          their associated persons are governed by Section 6(b)(7) of the
          Exchange Act, which provides that an exchange may not be
          registered with this Commission unless its rules "provide a fair
          procedure for the disciplining of members and persons associated
          with members[.]" [11]  Section 19(e)(1)(A) of the Exchange Act
          governs our review of disciplinary actions taken by self-
          regulatory organizations ("SROs"), including exchanges. [12]
          This section provides that, in reviewing an SRO proceeding, we
          shall determine whether the member or person engaged in the
          conduct found by the SRO, whether the proceedings were conducted
          in accordance with the rules of the SRO, and whether the rules
          were applied in a manner consistent with the purposes of the
          Exchange Act.  In this connection, we have indicated that a
          principle governing all SRO disciplinary proceedings is
          fairness. [13]
               Our past cases reviewing the fairness of SRO proceedings
          have focussed on the fairness of the SRO's internal procedures,
          including organizational structure as it affects the fairness and
          impartiality of the course of the proceeding. [14]  SRO rules, as
          well as the rules of many government agencies, by necessity
          address the entity's dual role in its disciplinary program as
          enforcer and adjudicator.  SROs (and government agencies)
          routinely perform such dual roles, and provide through their
          internal structures and procedures protection against the harms
          that may be caused by potential conflicts.  For example,
          litigation and adjudicatory functions are typically handled by
          different offices within the entity or different staff with
          different reporting chains. [15]  Such entities also protect
          against ex parte communications between parties and those
          involved in the decision-making process. [16]  Where such
          separation of functions are not scrupulously observed, courts do
          not hesitate to stop an agency from proceeding. [17]
               Consistent with these principles, the CHX was responsible
          for assuring the fairness of its decisional process in this case.
          The CHX's responsibility was not diminished by its decision to
          delegate all legal functions to a general counsel who is not in
          its employ, but rather is a partner with an outside law firm.
          The CHX was then obliged to ensure that the law firm conducted
          its actions on behalf of the CHX in a way that did not affect the
          integrity and fairness of the disciplinary proceeding against the
          Applicants.
          Need for Safeguards in Delegating Conflicting Functions to Law
          Firm
               Since we have not previously been presented with a situation
          raising this issue, we have looked by analogy to the authorities
          governing the handling, by private law firms, of conflict-of-
          interest issues in the representation of multiple clients.  We
          look primarily to both the American Bar Association's Model Rules
          of Professional Conduct ("Model Rules") and the American Law
          Institute Restatement (Third) of the Law: The Law Governing
          Lawyers ("Restatement"), rather than Illinois state law, for a
          national standard appropriate to a federal agency. [18]  We note,
          however, that Illinois rules, and case law interpreting them, are
          consistent with the Model Rules and Restatement.
               While we recognize that, as relevant here, Foley only had
          one client (the CHX), the firm represented the CHX in its
          performance in different roles.  Because those roles entailed
          fundamentally different objectives and interests, we believe the
          principles governing the propriety of a law firm's representation
          of multiple clients provide insight here. [19]
               The Model Rules instruct that attorneys within a single law
          firm cannot simultaneously represent adverse or conflicting
          interests, without appropriate safeguards.  Rule 1.7(a) of the
          Model Rules provides that a lawyer shall not represent a client
          if the representation of that client will be directly adverse to
          another client, unless the lawyer reasonably believes the
          representation will not adversely affect the relationship with
          the other client and the client consents after disclosure. [20]
          Rule 1.7(b) of the Model Rules provides that a lawyer shall not
          represent a client if the representation of that client may be
          materially limited by the lawyer's responsibilities to another
          client or to a third person, or by the lawyer's own interests,
          unless the lawyer reasonably believes the representation will not
          be adversely affected and the client consents after
          disclosure. [21]
               The first question we must answer, then, is whether the
          CHX's various roles as litigant for which Foley provided
          representation conflicted with the CHX's role as adjudicator in
          this disciplinary proceeding, given that both the litigation and
          the disciplinary proceeding involved the same or related facts.
          We find that there was a conflict.  In its role as adjudicator of
          the disciplinary proceeding, the CHX had to view the facts with
          an independent eye to assess whether or not a violation had
          occurred.  In its role as litigant, on the other hand, the CHX
          took the position that the Applicants had engaged in fraudulent
          conduct in connection with their LTV trading.
               For example, months before Foley attorneys represented the
          CHX Hearing Examiner, Foley represented the CHX's subsidiary the
          MCC in litigation against the Applicants in the Illinois courts,
          in a dispute arising from the MCC's imposition of cash delivery
          rules.  In the course of the litigation, the MCC took the
          position that the Applicants' LTV trading had violated the
          antifraud provisions of the federal securities laws and CHX
          rules.  Moreover, Simon's correspondence with the Federal Reserve
          Board questioning the propriety of the Applicants' arbitrage
          activities and the ultimate referral of the investigation of the
          Applicants' conduct to Sachnoff & Weaver evidences participation
          by Foley in the preliminary stages of the prosecutorial efforts
          against Applicants.  Finally, in the MCC disciplinary proceeding,
          Scattered and Greenblatt were charged with fraudulent conduct in
          connection with their application, over a year earlier, for
          clearing privileges on the MCC.  The MCC was represented, in the
          appeal to its Board of Directors, by Foley.  The same allegations
          against Applicants in these three proceedings resurfaced in the
          instant proceeding.
               We return to the Model Rules and the Restatement for further
          guidance as to the consequences of our finding that the CHX was
          represented by one law firm in its two conflicting roles.  If one
          attorney within a law firm is prohibited from representing a
          particular client because the client's interests conflict with
          those of another client, all other attorneys in that firm are
          also prohibited from representing that client, unless there are
          appropriate safeguards. [22]  Two concerns are addressed by such
          a prohibition.  First, the law presumes that client confidences
          held by one attorney within a law firm cannot be shielded from
          another attorney within the same firm. [23]  The resulting
          disqualification of a conflicted attorney presumed to have shared
          client confidences is called "imputed" or "vicarious"
          disqualification. [24]  Under this doctrine, the potential for
          inadvertent sharing of confidences among lawyers is sufficient
          for triggering disqualification of a law firm; actual sharing of
          confidences need not be shown. [25]  Second, representation of
          clients with conflicting interests raises the question whether
          the firm's representation lacks the unquestioned loyalty to its
          clients that the legal profession demands. [26]  In such cases,
          courts must disqualify counsel to enforce the attorney's duty of
          absolute fidelity to her clients and to guard against the danger
          of inadvertent use of confidential information. [27]
               Where, as here, one of the adverse interests being
          represented is that of an adjudicator in a disciplinary
          proceeding, the harm inherent both in the possible sharing of
          confidential information and in divided loyalty is that the
          fairness of the proceeding may be impaired.  In ruling on the
          fairness of agency proceedings, courts have held that the
          potential for bias can be shown where the decisionmaker had ex
          parte communications about the matter, or had, in a factually
          related case, taken an adversarial position against one of the
          parties. [28]  Bias has also been found where the same attorney
          represents a party in litigation over certain conduct while, at
          the same time, advising an adjudicator in its decision in a case
          arising from the same conduct. [29]  Under such circumstances,
          the commingling of adjudication and litigation functions creates
          the potential for bias. [30]
          Effectiveness of Measures Taken to Protect Against Bias
               Since the CHX had arranged for legal representation in all
          capacities by Foley, it was incumbent on the CHX to ensure that
          adequate safeguards were taken to protect against the impact of
          conflicting functions by the various Foley attorneys working on
          CHX matters.  For insight, we turn again to the resolution of
          conflict issues in private law firms in situations where adverse
          interests are represented simultaneously or subsequently.  The
          United States Court of Appeals for the Seventh Circuit has
          indicated that, once such a conflict is established, the next
          step is to determine whether the conflict can be cured by a
          screening mechanism adopted by the firm. [31]
               In examining the attempt to screen the adjudicatory function
          of the CHX in this case from other functions with which it was in
          conflict, we consider the elements of an effective screen:  (1)
          the screened lawyer cannot participate in the matter giving rise
          to the conflict, (2) the screened lawyer cannot discuss the
          conflicted matter with any member of the firm, [32] (3) the
          screened lawyer must be able to represent through sworn testimony
          that he or she has not imparted any confidential information to
          the firm, and (4) the screened lawyer cannot have access to any
          files or documents relating to the conflicted matter. [33]  In
          addition, courts have suggested that two other factors should
          also be considered:  the screen must be implemented in a timely
          fashion, [34] and the screened lawyer cannot share in any of the
          fees from the matter creating the conflict. [35]
               Relevant authority also suggests that the possible
          effectiveness of a screen arrangement is severely undermined
          where the adverse representation is concurrent, rather than
          successive:
               In the first situation, the work is ongoing, papers are
               circulating, and the attorneys are actively going about
               their tasks, discussing, as people do, their everyday cares
               with their associates.  By contrast, in the second
               situation, . . . [t]he other representation is over and done
               with -- documents relating to it are filed away, and the
               attorneys who worked on it are newly occupied with fresh
               business. [36]
          Even more of a danger is the potential in a concurrent
          representation of an improper division of the firm's
          loyalty. [37]
               We find that the screen Foley erected in April 1994 was
          ineffective.  Although the Screen Agreement kept Early from
          communicating with the Screened Attorneys about the disciplinary
          proceedings, it did not prevent Early from communicating with
          other Foley attorneys not bound by the Screen Agreement
          (including Caragher, who filed Foley's response to the
          Applicants' disqualification motions in the disciplinary
          proceedings).  The Screen Agreement did not separate Early from
          Foley files developed in the ongoing litigation matters with the
          Applicants.  Also, the Screen Agreement did not prevent Early
          from participating in fees derived by Foley's representation of
          the CHX in its litigation with the Applicants. [38]
               We also find that the screen was not established in a timely
          fashion.  Disciplinary charges against the Applicants were filed
          in late 1993; by that time, on behalf of the CHX, Foley had
          already filed motions to dismiss in the Sullivan & Long
          litigation, the MCC had concluded disciplinary proceedings
          against the Applicants, and the Applicants had commenced
          litigation in Illinois Chancery Court against the MCC and the
          MSTC.  Foley played a role as counsel to the CHX, the MCC, and
          the MSTC in each of these legal proceedings.  Foley did not
          implement the screen, however, until several weeks after Early
          was appointed in April 1994.
               We do not know whether any confidential information passed
          between Early and other Foley attorneys.  There is no credible
          evidence in the record to support Applicants' claims that the
          Screen Agreement was breached.  However, under the standards
          discussed above, such a showing is not necessary.
               We also find that, on the facts of this case, Foley's
          representation of the CHX in adverse postures resulted in the
          firm's loyalties being improperly divided.  Foley's
          representation of the CHX in other fact-related litigation
          involving Applicants was extensive both in scope and in potential
          remuneration for the firm.  For example, Foley's involvement in
          the litigation that conflicted with Foley's role as advisor to
          the Hearing Examiner gave the firm an interest in the outcome of
          the disciplinary hearing.  Further, Foley had conducted the
          preliminary investigation into whether violations of law had
          occurred as a result of Scattered's LTV trading.  The result of
          this preliminary investigation was the referral to Sachnoff &
          Weaver to develop the investigation and prosecute violations, if
          necessary.  Thus, Foley, in representing the CHX in its role as
          investigator of possible violations, had already developed an
          interest in pursuing the matter against the Applicants.
          The CHX's Contentions
               In defense of the fairness of its disciplinary proceeding,
          the CHX contends first that "the fact that [Foley] lawyers
          represented the Exchange in other litigation may have made those
          lawyers adverse to Scattered in that other litigation . . . [but]
          did not render [Foley] the investigator and prosecutor of the
          disciplinary charges."  Foley represented the CHX in its role as
          adjudicator of the Applicants.  Foley's representation of the CHX
          in matters that were "adverse to Scattered" involved the same
          conduct at issue in the disciplinary proceedings.  Thus, Foley,
          on behalf of the CHX, was involved in roles in conflict with the
          CHX's role as adjudicator of the Applicants.
               The CHX next claims that the independence of its Division of
          Market Regulation in the investigation and prosecution of the
          disciplinary case against the Applicants was maintained by the
          hiring of outside counsel, the Sachnoff firm, to represent Market
          Regulation.  This argument is similarly inapposite.  The
          independence of the adjudicator, and counsel advising him, is the
          issue here.  In any event, as our analysis above demonstrates,
          the hiring of Sachnoff occurred after Foley had already taken
          steps in the investigative process against Scattered.  Further,
          Foley's role in reviewing and approving Sachnoff's bills to the
          CHX placed Foley in a position to oversee Sachnoff in its
          prosecutorial role while Foley was advising the adjudicator.
               The CHX contends that, "even if . . . Simon and other
          [Foley] lawyers participated in the investigation or prosecution
          of this disciplinary proceeding, there is no evidence that these
          [Foley] lawyers participated in any way in the adjudication of
          this matter."  The CHX claims that Early did not have improper
          contacts with Sachnoff attorneys or other screened and non-
          screened Foley attorneys working on Scattered litigation matters.
          The CHX also argues that the Hearing Examiner explicitly found,
          when ruling on the Applicants' disqualification motions, that,
          regardless of the scope and timing of the screen, there was no
          improper communication between Early and any other Foley attorney
          representing CHX.  The CHX contends that the Applicants are
          incorrect in their assertion that the Hearing Examiner did not
          rule objectively on their disqualification motions.
               The CHX offers an affidavit by Early in support of these
          claims.  The affidavit, however, suffers from some of the same
          deficiencies as does the Screen Agreement.  Early declares that
          he has not discussed his representation of the Hearing Examiner
          or the Scattered disciplinary proceeding with any other Foley
          attorney or any CHX staff.  However, his declaration does not
          address discussions that may have occurred concerning Foley's
          other representation of the CHX, the MCC, and the MSTC in
          litigation matters adverse to the Applicants.  Nor does it
          address Early's access to Foley files.  More to the point,
          however, as our analysis above demonstrates, actual breaches of
          confidentiality need not be shown.  That there was no adequate
          protection against such possible breaches is sufficient to impair
          the fairness of the proceeding against the Applicants.  Moreover,
          Early's independence was further compromised by his financial
          interest in Foley's earnings from CHX as a client, and by the
          submission to the Hearing Examiner of a brief authored by one of
          Early's partners at Foley. [39]
               Finally, the CHX posits that due process permits the
          combination of investigative, prosecutorial and adjudicatory
          functions within the same agency. [40]  We have no quarrel with
          this general proposition.  As we discussed earlier, many
          administrative agencies and SROs are compelled to perform such
          combinations of functions.  Compliance with fundamental
          requirements of fairness, however, demands that adequate
          precautions be taken against the possibilities for prejudice that
          may inhere in such an administrative structure.  For the reasons
          discussed above, we do not believe adequate precautions were
          taken here.
                                         IV.
               We find that the conflicts of interest that entangled those
          providing the CHX with legal representation deprived the
          Applicants of a fair proceeding before a fair tribunal. [41]  We
          find that the conflicts, and resultant potential for bias, so
          infected the whole proceeding that all of the allegations,
          including those relating to American Healthcare Management Inc.
          (otherwise not implicated in the various conflicting litigation
          involving the CHX and Applicants), must be dismissed.
          Accordingly, we set aside the findings of violation and sanctions
          imposed by the Chicago Stock Exchange concerning the Applicants.
               An appropriate order will issue. [42]
               By the Commission (Chairman LEVITT and Commissioners
          JOHNSON, CAREY, and UNGER); Commissioner HUNT not participating.
                                                       Jonathan G. Katz
                                                          Secretary
          **ENDNOTES**
               [1]: Specifically, the CHX found violations of Section 10(a), 15
               U.S.C. 78j(a), and Rule 10a-1 thereunder (17 C.F.R.
               240.10a-1); and of Sections 9(a)(2), 9(a)(4), and 10(b), 15
               U.S.C. 78i(a)(2), 78i(a)(4) and 78j(b), and Rule 10b-5 (17
               C.F.R. 240.10b-5) thereunder; and various CHX rules.
               [2]:See Exchange Act Rule 10a-2(a); United States v.
               Naftalin, 441 U.S. 768, 771 n.2 (1979).
               [3]: Scattered Corporation Securities Litigation, 844 F. Supp.
               416, 419-21 (N.D. Ill. 1994).
               [4]:Sullivan & Long, et al. v. Scattered Corporation, 47
               F.3d 857 (7th Cir.) cert. denied sub nom. Harkins v.
               Scattered Corp., 516 U.S. 818 (1995).
               [5]:See Scattered Corp. v. The Chicago Stock Exchange, Inc.,
               No. 95-C-3598 (N.D. Ill. 1995), Fed. Sec. L. Rep. (CCH)
               98,986, aff'd., 98 F.3d 1004 (7th Cir. 1996).  A related
               action involved Scattered's appeal to this Commission of the
               CHX's failure to process Scattered's application for
               registration as a market maker.  CHX had refused to process
               the application until Scattered opened a 'V account'.  We
               dismissed as moot.  Scattered Corporation, Exchange Act
               Release No. 37249 (May 29, 1996), 62 SEC Docket 12.
               [6]:See Scattered Corp. v. The Chicago Stock Exchange, Inc.
               et al., Civil Action No. 14010, 1996 Del. Ch. LEXIS 79 (Del.
               Ct. Ch. 1996); Scattered Corp. and Laura Bryant v. Allan
               Bretzer, No. 95 L 10788 (Cir. Ct., Cook County motion for
               stay filed September 11, 1995).
               [7]:Leon A. Greenblatt, III, Exchange Act Release No. 34953
               (November 9, 1994), 57 SEC Docket 2977.
               [8]:In the Delaware litigation, the CHX was represented by
               other counsel.  The CHX directors and employees were
               represented by local counsel assisted by attorneys from
               Foley.  Compare, however, Scattered Corp. v. The Chicago
               Stock Exchange, Inc., et al., Civil Action No. 14010, 1996
               Del. Ch. LEXIS 79 (July 12, 1996), with Scattered Corp. v.
               The Chicago Stock Exchange, et al., Civil Action No. 14010,
               1997 Del. Ch. LEXIS 50 (April 7, 1997) (Foley assisted local
               counsel for the CHX directors and employees before the
               Delaware lower court, and assisted local counsel for the CHX
               on remand from the Delaware Supreme Court).  It is unclear
               from the record whether, or in what capacity, Foley was
               involved in the parallel Illinois state court litigation.
               [9]:The latter three represented the CHX in the Class
               Complaint litigation.
               [10]:Chicago Stock Exchange Rule 5(b).
               [11]:15 U.S.C. 78f(b)(7).
               [12]:15 U.S.C. 78s(e)(1)(A).
               [13]:See U.S. Associates, Inc., 51 S.E.C. 805, 810 (1993).
               [14]:See, e.g., Datek Securities Corp., 51 S.E.C. 542, 545-
               46 (1993).  There, we vacated a decision by the National
               Association of Securities Dealers ("NASD") because the
               hearing panel included two members whose firms had an
               interest in the outcome of the proceeding.  We determined
               that the potential for bias on the part of these panelists
               impaired the ability of the panel to render an impartial
               decision.
               [15]:See, e.g., Administrative Procedure Act, 5 U.S.C. 
               554(d) ("An employee or agent engaged in the performance of
               investigative or prosecuting functions for an agency in a
               case may not, in that or a factually related case,
               participate or advise in the decision, recommended decision,
               or agency review[.]"); New York Stock Exchange, Inc.,
               Constitution Article IX, Section 3 (NYSE hearing officers
               shall have no duties or functions relating to the
               investigation or preparation of disciplinary matters).
               [16]:See, e.g., Administrative Procedure Act, 5 U.S.C.
               554(d) (the person responsible for an initial decision
               shall not have ex parte communications with a person or
               party on a fact in issue, unless on notice and opportunity
               for all parties to participate).
               [17]:See, e.g., Amos Treat & Co. v. SEC, 306 F.2d 260, 265
               (D.C. Cir. 1962).  There, a member of the Commission
               participated in an adjudicatory function concerning a matter
               that had been initiated during that member's tenure as
               director of the division prosecuting the case.  In directing
               the district court to enjoin the Commission's proceedings,
               the D.C. Circuit said:  "It is not enough that here no
               corruption has been charged . . ..  What must control is the
               policy . . . and the principles . . . that the investigative
               as well as the prosecuting arm of the agency must be kept
               separate from the decisional function."
               [18]:Cf. In re Dresser Industries, Inc., 972 F. 2d 540 (5th
               Cir. 1992) (applying ethical rules announced by the national
               profession, rather than local court rules, to question of
               whether party's motion to disqualify counsel should be
               granted, on the grounds that while local rules are
               appropriate for local court to determine conduct of
               attorneys subject to sanctions, local rules alone cannot
               regulate parties' rights).
               [19]:Cf. SEC v. Fehn, 97 F. 3d 1276, 1294 (9th Cir. 1996)
               (discussing the ethical dilemma inherent in an attorney
               attempting to represent a client in an SEC investigation of
               previous disclosure violations and at the same time,
               attempting to advise that same client as to ongoing
               disclosure requirements), cert. denied, 118 S.Ct. 59 (1997).
               [20]:See also Restatement, Section 201 (Proposed Final Draft
               No. 1, 1996) ("Unless all affected clients and other
               necessary persons consent to the representation . . ., a
               lawyer may not represent a client if the representation
               would involve a conflict of interest").
               [21]:See also, id.
               [22]:See Model Rule 1.10(a); see also Restatement Section
               203 (Proposed Final Draft No. 1, 1996).
               [23]:See, e.g., Novo Terapeutisk Laboratorium A/S v. Baxter
               Travenol Laboratories, Inc., 607 F.2d 186, 196 (7th Cir.
               1979) (en banc); United States for Use and Benefit of Lord
               Electric Co., Inc. v. Titan Pacific Const. Corp., 637 F.
               Supp. 1556, 1564 (W.D.Wa. 1986).
               [24]:See, generally, Note, The Chinese Wall Defense to Law-
               Firm Disqualification, 128 U.Penn.L.Rev. 677, 689 (1980).
               [25]:See, e.g., Analytica, Inc. v. NPD Research, Inc., 708
               F.2d 1263, 1267-69 (7th Cir. 1983).
               [26]:See, e.g., Trone v. Smith, 621 F.2d 994, 998-99 (9th
               Cir. 1980) (total professional commitment to a client is
               endangered by simultaneous representation of adverse
               interests); La Salle National Bank v. Triumvera Homeowners
               Ass'n., 109 Ill.App.3d 654, 664, 440 N.E.2d 1073, 1080 (Ill.
               App. 1982).
               [27]:See La Salle National Bank, supra, 109 Ill.App.3d at
               664-65 (citing Silver Chrysler Plymouth, Inc. v. Chrysler
               Motors Corp., 518 F.2d 751 (2d Cir. 1975)).
               [28]:See, e.g., Grolier Incorporated v. FTC, 615 F.2d 1215,
               1220 (9th Cir. 1980) (discovery into administrative law
               judge's prior involvement allowed where law judge presiding
               over case had previously served as confidential assistant to
               FTC commissioner authorizing the same case); Trans World
               Airlines, Inc. v. Civil Aeronautics Board, 254 F.2d 90, 91
               (D.C. Cir. 1958) (former solicitor who had represented
               Postmaster General in litigation against party and who later
               became member of administrative board disqualified from
               ruling on related litigation).
               [29]:See, e.g., Walker v. City of Berkeley, 951 F.2d 182,
               184 (9th Cir. 1991) (where same person served as both
               counsel to administrative decisionmaker and as advocate in a
               federal court proceeding involving the same parties and the
               same underlying issue, petitioner was denied a fair
               hearing); American General Ins. Co. v. FTC, 589 F.2d 462,
               464-65 (9th Cir. 1979) (member of FTC should have
               disqualified himself from participation in the Commission's
               decision where he had previously participated in the case as
               counsel).
               [30]:See, e.g., Yamaha Motor Corporation v. Riney, 21 F.3d
               793, 798 (8th Cir. 1994) (where ample evidence showed bias
               on the part of state commissioner, bias rendered the
               commission incompetent to decide the issues before it.)
               [31]:See, e.g., Schiessle v. Stephens, 717 F.2d 417, 421
               (7th Cir. 1983).
               [32]:See Westinghouse Electric Corp. v. Kerr-McGee Corp.,
               580 F.2d 1311, 1321 (7th Cir.) (screen that segregated two
               groups of attorneys from each other was insufficient to
               rebut presumption of shared confidences because it did not
               shield contacts with non-segregated attorneys), cert. denied
               439 U.S. 955 (1978).
               [33]:See, generally, Peterson, Rebuttable Presumptions and
               Intra-firm Screening:  The New Seventh Circuit Approach to
               Vicarious Disqualification of Litigation Counsel, 59 Notre
               Dame L.Rev. 399, 410-11 (1984).  See also Rule 1.10(e) of
               the Illinois Rules.
               [34]:See EZ Paintr Corporation v. PADCO, Inc., 746 F.2d
               1459, 1462 (Fed. Cir. 1984) (screen implemented three months
               after conflict occurred and after disqualification motion
               was filed was too late to rebut presumption of shared client
               confidences); see, also, Parker, Private Sector Chinese
               Walls: Their Efficacy as a Method of Avoiding Imputed
               Disqualification, 19 J. Legal Prof. 345, 349 (1995) ("As to
               timeliness, the most common defect is that the firm
               establishes screening mechanisms sometime after the
               disqualified attorney has joined the firm.")
               [35]:See, e.g., Kovacevic v. Fair Automotive Repair, Inc.,
               641     F. Supp. 237, 244 (N.D.Ill. 1986) (screen timely
               implemented was sufficient to rebut presumption of shared
               confidences, provided that the conflicted attorneys agree
               not to share in the profits or fees derived from the
               conflicted representation).
               [36]:The Chinese Wall Defense, supra, at 691.  See also
               analysis of cases addressing concurrent and successive
               representation by law firms contained therein.
               [37]:See Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384,
               1387 (2d Cir. 1976).
               [38]:Nothing in the record addresses the compensation
               arrangement for Foley partners involved in the
               representation of the CHX.  It would appear, however, that a
               specific agreement not to share in compensation derived from
               any conflicted representation has been required.  See
               Kovacevic, 641         F. Supp. at 244.
               [39]:Cf. Yamaha Motor Corporation v. Riney, supra, 21 F.3d
               at 798 ("Bias can be shown by a finding that the adjudicator
               prejudged the issues or had a pecuniary interest in the
               subject of the action.  In general, the test is whether the
               adjudicator's situation is one 'which might lead him not to
               hold the balance [between the parties] nice, clear and
               true." citing Tumey v. Ohio, 273 U.S. 510, 532 (1927)).
               [40]:Citing Gibson v. F.T.C., 682 F.2d 554, 560 (5th Cir.
               1982), cert. denied, 460 U.S. 1068 (1983); and Swanson v.
               Board of Police Commissioners., 197 Ill. App. 3d 592, 598-
               601, 555 N.E. 2d 35, 40-42 (Ill. App.), appeal denied, 133
               Ill. 2d 574, 561 N.E. 2d 708 (1990) (Table).
               [41]:The CHX and the Applicants have both filed various
               procedural and evidentiary motions.  We deny such motions to
               the extent they conflict with this opinion.
               [42]:All of the arguments advanced by the parties have been
               considered.  They are rejected or sustained to the extent
               that they are inconsistent or in accord with the views
               expressed in this opinion.
                               UNITED STATES OF AMERICA
                                      before the
                          SECURITIES AND EXCHANGE COMMISSION
          SECURITIES EXCHANGE ACT OF 1934
          Rel. No.  40646  / November 9, 1998
          Admin. Proc. File No. 3-9212
          ________________________________________________
                                                          :
               In the Matter of the Application of        :
                                                          :
                    SCATTERED CORPORATION                 :
                              and                         :
                  LEON AARON GREENBLATT, III              :
                    ANDREW ALVIN JAHELKA                  :
                    RICHARD OWEN NICHOLS                  :
                        LAURA BRYANT                      :
                                                          :
               For Review of Action Taken by the          :
                                                          :
                  CHICAGO STOCK EXCHANGE, INC.            :
          ________________________________________________:
          ORDER DISMISSING DISCIPLINARY ACTION TAKEN BY REGISTERED
          SECURITIES ASSOCIATION
               On the basis of the Commission's opinion issued this day, it
          is
               ORDERED that the disciplinary action taken by the Chicago
          Stock Exchange, Inc. against Scattered Corporation, Leon A.
          Greenblatt, III, Andrew A. Jahelka, Richard O. Nichols, and Laura
          Bryant, and its assessment of costs, be and they hereby are, set
          aside.
               By the Commission.
                                                       Jonathan G. Katz
                                                          Secretary