Case Scenario:
Donny's ownership of an interest in a client company is definitely a problem. Even though the stock purchase was made through completely legal means, and by using no insider information, it still can present a host of problems. The main problem is that since he owns stock in the company, he has personal gain considered based on how the client does financially. If the company's profits start to soar, all the better for him. If he learns that the company is in legal trouble, and may have a large contingent liability, he then knows that financial danger may lurk ahead, in which case he dumps his stock. Even if Donny's intentions are all good, and he plans to use no insider information, he would still be made aware, through his normal course of business, about things going on in the client company that can affect the value of his stock.
The firm suggested restricting the files from him, which is an option. This isn't the most feasible option, but it could possibly work. Put yourself in Danny's position - you have no ill motive, but you do hold an undisclosed amount of stock in the client company. In your firm, you also have access to client files, and through the course of normal business dealings, you learn that there are lawsuits against the client company, or you learn that they're about to fold. It would be very hard to legitimately prove (to your firm's management) that you would take no personal interest in such matters. Due to this fact, it is a conflict of interest for him to hold stock in a client company.
Let's also think about it this way. Danny has to review or evaluate certain financial information for the client company. Let's say he has to write a report about the client's pending litigation. Since he owns stock in the company, can he do so as impartially as he would for any other client, or would he try to soften the situation, not wanting to give users of that information a potential reason to pull out of the company, which could eventually lead to the company's falling stock prices, causing him to lose money?
Most would be convinced that Danny can't hold stock and remain impartial about normal business dealings he hears that are going on in the client company, that he must also be involved with. The only option for him to remain completely unattached would be to not have access to the files as mentioned, or sell the stock. This is also important in future litigation. Let's say Danny's firm screws up somewhere down the road, involving this company. When it comes out in court that one of the attorney's held stock in the client company, it's not going to look to the court like Danny could have carried out his duties at his firm and remain totally unbiased, since he held interest in the client company.